Gross Domestic Product decreased by 0.1% in the 4th quarter of 2012, driven by declines in private inventory growth and government spending, primarily defense spending. All changes in Gross Domestic Product are important to the regional economy, as this region’s employment growth and income growth track the national experience.

 
Personal Consumption expenditures expanded strongly, and contributed 1.52% to GDP, driven mainly by purchases of durable goods. Fixed investment expansion added 1.19% to GDP, but this was swamped by a 1.27% decline in private inventories (inventories had added 0.73% in the 3rd quarter). While shrinking inventories indicate a lack of confidence about future quarters, the impact of inventory changes are transitory in nature.

The most important decline was driven by government expenditures, which subtracted 1.33% from GDP, and were led by cuts in defense spending.  A decline in defense spending shrunk the national economy by 1.25% in the fourth quarter, as real defense spending declined 22.2% between the 3rd and 4th quarter of 2012. This large decline in defense spending is related to both the draw down in activity overseas and the military trying to trim contracts in anticipation of sequestration. It should be noted that defense spending increased sharply in the third quarter of 2012, as a result of the combined effort to spend before the end of the U.S. fiscal year (which begins in September) and trying to spend before sequestration could impact already obligated funds.  The decline in defense spending strongly impacts the defense industry in Hampton Roads.